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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Nicholas Financial-Canada is a Canadian holding company incorporated under the laws of British Columbia in 1986. Nicholas Financial-Canada currently conducts its business activities exclusively through a wholly-owned indirect Florida subsidiary, Nicholas Financial. Nicholas Financial is a specialized consumer finance company engaged primarily in acquiring and servicing automobile finance installment contracts (“Contracts”) for purchases of used and new automobiles and light trucks. To a lesser extent, Nicholas Financial also originates direct consumer loans (“Direct Loans”) and sells consumer-finance related products. Nicholas Financial’s financing activities accounted for 100% of the Company’s consolidated revenue for the fiscal years ended March 31, 2020 and 2019. A second Florida subsidiary, Nicholas Data Services, Inc. (“NDS”), serves as an intermediate holding company for Nicholas Financial. In addition, NF Funding I, LLC (“NF Funding I”) is a wholly-owned, special purpose financing subsidiary of Nicholas Financial.

Nicholas Financial-Canada, Nicholas Financial, NDS, NF Funding I are collectively referred to herein as the “Company”.

Introduction

The Company’s consolidated revenues decreased from $71.3 million for the fiscal year ended March 31, 2019 to $62.1 million for the fiscal year ended March 31, 2020. The Company’s diluted earnings per share increased from a loss of $0.46 per share for the fiscal year ended March 31, 2019 to a net income of $0.45 per share for the fiscal year ended March 31, 2020. The Company reported a $2.2 million operating income for the year ended March 31, 2020 compared to operating loss of $4.6 million for the year ended March 31, 2019. The increase was a result of:

• focused disciplined underwriting and risk-based pricing;

• increased year-over-year gross portfolio yield;

The Company’s consolidated net income for the fiscal year ended March 31, 2020 was $3.5 million as compared to net loss of $3.6 million for the fiscal year ended March 31, 2019.

The gross portfolio yield of the portfolio for the fiscal years ended March 31, 2020 and 2019, was 27.41% and 26.40%, respectively. Primarily as a result of increased competition within the industry and the Company’s decision not to sacrifice pricing for volume, the average dealer discount as a percent of finance receivables associated with new volume for the fiscal years ended March 31, 2020 and 2019 was 7.9% and 8.2%, respectively. The increase in APR (and therefore overall yield) on new purchases in fiscal 2020 as compared with fiscal 2019 was primarily driven by the Company’s recommitment to its core principles of disciplined underwriting and, risk-based pricing.

Portfolio Summary Fiscal Year ended March 31, (In thousands)

Interest and fee income on finance receivables 62,095 71,300

Net interest and fee income on finance receivables $ 53,580 $ 61,796

Interest expense as a percentage of average finance receivables 3.76 % 3.52 %

Pre-tax yield as a percentage of average finance receivables (4) 0.99 % (1.70 )%

Allowance percentage (6) 4.93 % 6.28 %

COVID-19

While the magnitude and duration of the impact from COVID-19 on our business remains uncertain, it may negatively affect our business and financial condition.

While the Company’s results of operations in April and May 2020 appeared to be resilient to downward pressure exerted by macroeconomic conditions, such as significant increases in unemployment across the country, there can be no assurance that this apparent resilience can be sustained.

The government stimulus checks, which briefly increased daily cash collections in April 2020, the expansion of unemployment benefits by the CARES Act to allow individuals to receive their weekly unemployment benefit for a maximum of 39 weeks, and the fact that unemployed customers are expected to be eligible to receive Pandemic Unemployment Compensation (“PUC”) equal to an additional $600 per week through July 31, 2020, collectively are

expected to have a beneficial effect on the Company. The Company continued to experience strong cash collections in May 2020 and experienced positive trending on gross charge-off balances in April 2020 and May 2020.

However, the extent to which the COVID-19 pandemic will impact our business, financial condition, results of operations or cash flows will depend on numerous evolving factors that we are unable to accurately predict at this time. The length and scope of the restrictions imposed by various governments and success of efforts to find a suitable vaccine, among other factors, will determine the ultimate severity of the COVID-19 impact on our business. However, it is likely that prolonged periods of difficult market conditions could have material adverse impacts on our business, financial condition, results of operations and cash flows.

Critical Accounting Policy

The Company’s critical accounting policy relates to the allowance for credit losses. It is based on management’s opinion of an amount that is adequate to absorb losses incurred in the existing portfolio. Because of the nature of the customers under the Company’s Contracts and Direct Loan program, the Company considers the establishment of adequate reserves for credit losses to be imperative.

During the first quarter of fiscal 2019, the Company began using the trailing six-month net charge-off percentage, annualized, and applied to ending finance receivables to calculate the allowance for credit losses. This change was made to reflect changes in the Company’s lending policies and underwriting standards, which resulted from the Company changing its business strategies. The change in the Company’s method for calculating the allowance for credit losses was accounted for as a change in estimate. The Company re-focused on financing primary transportation to and from work for the subprime borrower. This change resulted in purchasing higher yielding loans, with smaller amounts financed and shorter monthly terms. A trailing six-month net charge-off percentage, annualized, applied to ending finance receivables is also more in line with the industry practice, which typically uses a trailing twelve-month net charge-off methodology. Management believes a trailing six-month will more quickly reflect changes in the portfolio.

In addition, the Company takes into consideration the composition of the portfolio, current economic conditions, the estimated net realizable value of the underlying collateral, historical loan loss experience, delinquency, non-performing assets, and bankrupt accounts when determining management’s estimate of probable credit losses and the adequacy of the allowance for credit losses. If the allowance for credit losses is determined to be inadequate, then an additional charge to the provision would be recorded to maintain adequate reserves based on management’s evaluation of the risk inherent in the loan portfolio.

Contracts are purchased from many different dealers and are all purchased on an individual Contract-by-Contract basis. Individual Contract pricing is determined by the automobile dealerships and is generally the lesser of the applicable state maximum interest rate, if any, or the maximum interest rate which the customer will accept. In most markets, competitive forces will drive down Contract rates from the maximum rate to a level where an individual competitor is willing to buy an individual Contract. The Company generally purchases Contracts on an individual basis.

The Company utilizes the branch model, which allows for Contract purchasing to be done at the branch level. The Company has detailed underwriting guidelines it utilizes to determine which Contracts to purchase. These guidelines are specific and are designed to provide reasonable assurance that the Contracts that the Company purchases have common risk characteristics. The Company utilizes its District Managers to evaluate their respective branch locations for adherence to these underwriting guidelines, as well as approve underwriting exceptions. The Company also utilizes internal audit (“IA”) to assure adherence to its underwriting guidelines. Any Contract that does not meet the Company’s underwriting guidelines can be submitted by a branch manager for approval from the Company’s District Managers or senior management.

Fiscal 2020 Compared to Fiscal 2019

Interest and Fee Income on Finance Receivables

Interest and fee income on finance receivables, predominantly finance charge income, decreased to $62.1 million in fiscal 2020 as compared to $71.3 million in fiscal 2019. The average finance receivables totaled $226.5 million for the fiscal year ended March 31, 2020, a decrease of 16.1% from $270.1 million for the fiscal year ended March 31, 2019. Purchasing volume has continued to decrease from fiscal 2019 as a result of tightening the Company’s credit underwriting standards and a reduction in auto sales year over year.

Competition also continued to affect the Company’s ability to acquire Contracts, furthermore, the Company’s renewed strategic focus on financing primary transportation to and from work for the subprime borrower has impacted the Company’s ability to acquire Contracts at desired yields. The average APR on new Contract purchases decreased slightly from 23.5% for fiscal year 2019 to 23.4% for fiscal year 2020. Concurrently, the dealer discount on new Contract purchases decreased from 8.2% for fiscal year 2019 to 7.9% for fiscal year 2020. Related to desired yields, the Company’s strategy focused on risk-based pricing (rate, yield, advance, term, etc.) and a commitment to the underwriting discipline required for optimal portfolio performance as opposed to chasing competition for the sake of simply generating volume.

The gross portfolio yield increased to 27.4% for the fiscal year ended March 31, 2020 as compared to 26.4% for the fiscal year ended March 31, 2019. The gross portfolio yield increased primarily due to increase in the average portfolio APR from 22.98% for the fiscal year 2019 to 23.12% for fiscal year 2020. The net portfolio yield increased to 16.2% for the fiscal year ended March 31, 2020 from 10.7% for the fiscal year ended March 31, 2019. The net portfolio yield increased primarily due to a decrease in the provision for credit losses as a percentage of finance receivables, as described under “Analysis of Credit Losses” below. Additionally, the Company recorded lower interest expenses for the fiscal year 2020, which also increased net portfolio yield.

Operating Expenses

Operating expenses increased slightly to $34.4 million for the fiscal year ended March 31, 2020 compared to $33.5 million for the fiscal year ended March 31, 2019 as a result of increases across expense accounts, including but not limited to acceleration of dealers’ spiffs expenses, bank/custody fees, professional/consulting fees, and repossessions/collection expenses. Marketing expenses decreased approximately $0.9 million from the prior year due to the Company no longer capitalizing bonus (“Spiffs”) paid to the dealers in fiscal year 2020. The Company accounted for this change as a change in accounting estimate. Beginning in fiscal 2019, spiffs are expensed when incurred. Salaries and employee benefits decreased by approximately $0.2 million, resulting from a reduction in the number of employees, which was offset by increases in bonuses and benefits to employees. Administrative expense increased approximately $1.7 million primarily due to increases of $0.6 million in collateral protection insurance charges, $0.5 million in repossession and recovery expenses, and $0.5 million in bank and custody fees.

Interest Expense

Interest expense decreased to $8.5 million for the fiscal year ended March 31, 2020, as compared to $9.5 million for the fiscal year ended March 31, 2019, due to a decrease in average outstanding debt and interest rate. The average outstanding debt during the year ended March 31, 2020 decreased to $132.6 million from $136.4 million during the year ended March 31, 2019. The following table summarizes the Company’s average cost of borrowed funds for the fiscal years ended March 31:

Variable interest under the line of credit and credit facility 2.67 % 2.97 %

Credit spread under the line of credit and credit facility 3.75 % 4.00 %

Average cost of borrowed funds 6.42 % 6.97 %

LIBOR rates have decreased (0.99% as of March 31, 2020 compared to 2.49% as of March 31, 2019) and the Company’s credit spread under the line of credit decreased (3.75% as of March 31, 2020 compared to 4.00% as of March 31, 2019). For further discussions regarding interest rates see “Note 5 – Credit Facility”.

Analysis of Credit Losses

The following table sets forth a reconciliation of the changes in the allowance for credit losses on Contracts and Direct Loans for the fiscal years ended March 31:

For the year ended March 31, 2020

(In thousands)

Indirect Direct Total

For the year ended March 31, 2019

(In thousands)

Indirect Direct Total

During the first quarter of the fiscal year ended March 31, 2019, the Company began using the trailing six-month net charge-off percentage, annualized, and applied to ending finance receivables to calculate the allowance for credit losses. This change was made to reflect changes in the Company’s lending policies and underwriting standards, which resulted from the Company changing its business strategies. The Company re-focused on financing primary transportation to and from work for the subprime borrower. This change resulted in purchasing higher yielding loans, with smaller amounts financed and shorter monthly terms. A trailing six-month, annualized, is also more in line with the industry practice, which uses a trailing twelve-month. Management believes a trailing six-month more accurately reflects changes in the portfolio. Using the prior method (discussed below), the allowance and provision expense for the first quarter of fiscal 2019 would have been approximately $151,000 lower.

As of March 2019, the Company changed its charge-off policy from 181 days past due to 121 days past due, which resulted in the Company charging-off approximately $6.4 million of finance receivables during the fourth quarter of fiscal 2019. This one-time charge-off, of approximately $6.4 million, was excluded from the March 31, 2019 allowance for credit losses calculation.

In addition, the Company takes into consideration the composition of the portfolio, current economic conditions, estimated net realizable value of the underlying collateral, historical loan loss experience, delinquency, non-performing assets, and bankrupt accounts when determining management’s estimate of probable credit losses and adequacy of the allowance for credit losses. If the allowance for credit losses is determined to be inadequate, then an additional charge to the provision is recorded to maintain adequate reserves based on management’s evaluation of the risk inherent in the loan portfolio. Conversely, the Company could identify abnormalities in the composition of the portfolio, which would indicate the calculation is overstated and management judgement may be required to determine the allowance of credit losses for both Contracts and Direct Loans.

The provision for credit losses decreased to $16.9 million for the fiscal year ended March 31, 2020 from $32.8 million for the fiscal year ended March 31, 2019, largely due to the 16.1% decrease in the average finance receivables.

Net charge-offs decreased to 10.0% for the fiscal year ended March 31, 2020 from 13.4% for the fiscal year ended March 31, 2019, primarily resulting from the Company changing its charge-off policy from 181 days past due to 121 days past due, which resulted in the Company charging-off approximately $6.4 million of finance receivables during the fourth quarter of fiscal 2019, in a one-time charge-off.

The delinquency percentage for Contracts more than thirty days past due, excluding Chapter 13 bankruptcy accounts, as of March 31, 2020 was 10.2%, a slight increase from 10.1% as of March 31, 2019. The delinquency percentage for Direct Loans more than thirty days past due, excluding Chapter 13 bankruptcy accounts, as of March 31, 2020 was 4.6%, an increase from 3.8% as of March 31, 2019.

In accordance with Company policies and procedures, certain borrowers qualify for, and the Company offers, one-month principal payment deferrals on Contracts and Direct Loans. For the fiscal years ended March 31, 2020 and March 31, 2019 the Company granted deferrals to approximately 13.8% and 13.2%, respectively, of total Contracts and Direct Loans. The increase in the total number of deferrals in fiscal 2020 compared to fiscal 2019 was primarily the result of a spike on March 31, 2020. However, the Company experienced increased collections on finance receivables on gross charge-off balances in April 2020 and May 2020.

Income Taxes

The Company recorded a tax benefit of approximately $1.2 million during fiscal 2020 compared to a $0.9 million income tax benefit during fiscal 2019. The Company’s effective tax rate in fiscal 2020 was (54.3)% compared to 20.5% in fiscal 2019. For further discussion regarding income taxes see “Note 7 – Income Taxes”.

Liquidity and Capital Resources

The Company’s cash flows are summarized as follows:

Fiscal Year ended March 31, (In thousands)

Cash provided by (used in):

Net increase (decrease) in cash $ (12,958 ) $ 35,016

The Company’s primary use of working capital for the fiscal year ended March 31, 2020 was funding the purchase of Contracts, which are financed substantially through cash from principal and interest payments received, and the Company’s line of credit.

On March 29, 2019, NF Funding I, a special purpose financing subsidiary of Nicholas Financial, entered into a senior secured credit facility (the “Credit Facility”) pursuant to a credit agreement with Ares Agent Services, L.P., as administrative agent and collateral agent, and the lenders that are party thereto (the “Credit Agreement”). The Company’s prior line of credit was paid off in connection with this Credit Facility. As of March 31, 2020, the total amount outstanding under the Credit Facility was $126.8 million. The Company decreased the total amount outstanding to $119.0 million on May 31, 2020.

Pursuant to the Credit Agreement, the lenders agreed to extend to the Company a line of credit of up to $175,000,000, which will be used to purchase Contracts from Nicholas Financial on a revolving basis pursuant to a related receivables purchase agreement between NF Funding I and Nicholas Financial (the “Receivables Purchase Agreement”). Under the terms of the Receivables Purchase Agreement, Nicholas Financial sells to NF Funding I the receivables under Contracts. Nicholas Financial continues to service the Contracts transferred to NF Funding I pursuant to a related servicing agreement (the “Servicing Agreement”).

The availability of funds under the Credit Facility is generally limited to 82.5% of the value of non-delinquent receivables, and outstanding advances under the Credit Facility will accrue interest at a rate of LIBOR plus a credit spread, which is currently 3.75%. The commitment period for advances under the Credit Facility is three years. At the end of the commitment period, the outstanding balance would be paid off over a four-year amortization period.

The Company will continue to depend on the availability the Credit Facility, together with cash from operations, to finance future operations. The Credit Agreement and the other loan documents contain customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and sales of receivables. See “Risk Factors—Our Credit Facility is subject to certain defaults and negative covenants.” If an event of default occurs under the Credit Facility, the Company’s lenders could increase the Company’s borrowing costs, restrict the Company’s ability to obtain additional borrowings under the facility, accelerate all amounts outstanding under the facility, or enforce their interest against collateral pledged under the facility, or enforce their rights under guarantees.

On May 27, 2020, the Company obtained a loan in the amount of $3,243,900 from Fifth Third Bank in connection with the U.S. Small Business Administration’s Paycheck Protection Program (the “PPP Loan”) pursuant to a Note by the Company in favor of Fifth Third Bank in such principal amount. Pursuant to the Paycheck Protection Program, all or a portion of the PPP Loan may be forgiven if the Company uses the proceeds of the PPP Loan for its payroll costs and other expenses in accordance with the requirements of the Paycheck Protection Program. While, the Company intends to use the proceeds of the PPP Loan for payroll costs and other covered expenses and intends to seek full forgiveness of the PPP Loan as soon as permitted under the Paycheck Protection Program, there can be no assurance that the Company will obtain any forgiveness of the PPP Loan.

If the PPP Loan is not fully forgiven, the Company will remain liable for the full and punctual payment of the outstanding principal balance plus accrued and unpaid interest. The PPP Loan accrues interest at a rate per annum equal to 1.00% and an initial payment of accrued and unpaid interest is due on December 27, 2020. The outstanding principal balance plus accrued and unpaid interest is due on May 27, 2022. The PPP Loan is unsecured and is a non-resource obligation. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The note contains events of default and other provisions customary for a loan of this type.

Impact of Inflation

The Company is affected by inflation primarily through increased operating costs and expenses including increases in interest rates. Inflationary pressures on operating costs and expenses historically have been largely offset by the Company’s continued emphasis on stringent operating and cost controls, although no assurances can be given regarding the Company’s ability to offset the effects of inflation in the future.

Contractual Obligations

The following table summarizes the Company’s material obligations as of March 31, 2020.

Payments Due by Period (In thousands)

Total Less than 1 year 1 to 3 years 3 to 5 years More than 5 years

The Company’s $175.0 million commitment period for advances under the Credit Facility terminates March 31, 2022. At the end of the commitment period, the outstanding balance would be paid off over a four-year amortization period. The pricing of the Credit Facility is 375 basis points above 30-day LIBOR. The unused line fee on the Credit Facility is 0.50%. Interest on outstanding borrowings under the Credit Facility as of March 31, 2020, is based on an effective interest rate of 6.42%. The effective interest rate used in the above table does not contemplate the possibility of entering into interest rate swap agreements in the future.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Market risks relating to the Company’s operations result primarily from changes in interest rates. The Company does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for trading purposes.

Interest Rate Risk

We are subject to interest rate risk. As of March 31, 2020, $126.8 million, or 100% of our total debt, was subject to floating interest rates. A hypothetical increase in the variable interest rates of 1% or 100 basis points would result in an annual pre-tax increase of interest expense of approximately $1.3 million.

Item 8. Financial Statements and Supplementary Data

The following financial statements are filed as part of this Report:

Report of Independent Registered Public Accounting Firm 37

Audited Consolidated Financial Statements

Consolidated Balance Sheets 38

Consolidated Statements of Income (Loss) 39

Consolidated Statements of Shareholders’ Equity 40

Consolidated Statements of Cash Flows 41

Notes to the Consolidated Financial Statements 43

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Nicholas Financial, Inc. and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Nicholas Financial, Inc. and Subsidiaries (the Company) as of March 31, 2020 and 2019, the related consolidated statements of income (loss), shareholders’ equity and cash flows, for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ RSM US LLP

We have served as the Company's auditor since 2018.

Raleigh, North Carolina

June 22, 2020

Nicholas Financial, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands)

Assets

Operating lease right-of-use assets 2,598 -

Prepaid expenses and other assets 1,126 1,378

Property and equipment, net 482 656

Liabilities and shareholders’ equity

Unamortized debt issuance costs (2,575 ) (2,381 )

Operating lease liabilities 2,652 -

Accounts payable and accrued expenses 4,332 4,916

Shareholders’ equity:

Preferred stock, no par: 5,000 shares authorized; none issued — —

Total liabilities and shareholders’ equity $ 238,818 $ 252,420

Repossessed assets 1,277 -

Liabilities

Accounts payable and accrued expenses 597 -

See accompanying notes to the Consolidated Financial Statements.

Nicholas Financial, Inc. and Subsidiaries

Consolidated Statements of Income (Loss)

(In thousands, except per share amounts)

Fiscal Year ended March 31,

Interest and fee income on finance receivables $ 62,095 $ 71,300

Expenses:

Amortization of intangibles 55 -

Goodwill impairment charge 295 -

Operating income (loss) before income taxes 2,247 (4,588 )

Earnings (loss) per share:

Diluted $ .45 $ (.46 )

See accompanying notes to the Consolidated Financial Statements.

Nicholas Financial, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(In thousands)

Common Stock Total

Shares Amount Treasury Stock Retained Earnings Shareholders' Equity

Issuance of restricted stock awards 25 — — — —

Exercise of stock options 12 16 — — 16

Cancellation of restricted stock awards (22 ) — — — —

Share-based compensation — 80 — — 80

Issuance of restricted stock awards 39 — — — —

Exercise of stock options 2 5 — — 5

Cancellation of restricted stock awards (26 ) — — — —

Treasury stock repurchases (119 ) — (979 ) — (979 )

Share-based compensation — 202 — — 202

See accompanying notes to the Consolidated Financial Statements.

Nicholas Financial, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

Fiscal Year ended March 31,

Cash flows from operating activities:

Amortization of intangibles 55 -

Amortization of debt issuance costs 429 -

Amortization of operating of lease right-of-use assets 1,913 -

Gain on sale of property and equipment (23 ) (62 )

Goodwill impairment charge 295 -

Amortization of dealer discounts (8,031 ) (10,641 )

Amortization of insurance and fee commissions (2,615 ) (1,797 )

Accretion of purchase price discount (746 ) -

Principal reduction on operating lease liabilities (1,841 ) -

Share-based compensation 202 80

Changes in operating assets and liabilities:

Accrued interest receivable (275 ) (157 )

Prepaid expenses and other assets 304 (110 )

Accounts payable and accrued expenses (744 ) (2,046 )

Income taxes receivable (3,244 ) (149 )

Unearned insurance and fee commissions 210 -

Net cash provided by operating activities 10,485 14,044

Cash flows from investing activities:

Purchase and origination of finance receivables (89,334 ) (85,240 )

Net assets acquired from branch acquisitions, primarily loans (20,483 ) -

Purchase of property and equipment (130 ) (228 )

Proceeds from sale of property and equipment 23 97

Net cash (used in) provided by investing activities (3,676 ) 44,159

Cash flows from financing activities:

Payment of loan originations fees (623 ) (2,453 )

Proceeds from exercise of stock options 5 16

Repurchases of treasury stock (979 ) -

Net cash used in financing activities (19,767 ) (23,187 )

Cash and restricted cash, beginning of year 37,642 2,626

Cash and restricted cash, end of year $ 24,684 $ 37,642

Supplemental Disclosures:

Income taxes paid during the year 6 44

Leased assets obtained in exchange for new operating lease liabilities 4,058 -

Fiscal Year ended March 31,

See accompanying notes to the Consolidated Financial Statements.

Nicholas Financial, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1. Organization and Basis of Presentation

Nicholas Financial, Inc. (“Nicholas Financial – Canada”) is a Canadian holding company incorporated under the laws of British Columbia with two wholly owned United States subsidiaries, Nicholas Data Services, Inc. (“NDS”) and Nicholas Financial, Inc. (“NFI”). NDS historically was engaged in supporting and updating industry-specific computer application software for small businesses located primarily in the Southeastern United States. NDS has ceased its operations; however, it continues as the interim holding company for Nicholas Financial. NFI is a specialized consumer finance company engaged primarily in acquiring and servicing automobile finance installment contracts (“Contracts”) for purchases of used and new automobiles and light trucks. NFI also offers direct consumer loans (“Direct Loans”) and sells consumer-finance related products. In addition, NF Funding I, LLC (“NF Funding I”), is a wholly-owned, special purpose financing subsidiary of NFI. All three companies are based in Florida, U.S.A. The accompanying consolidated financial statements are stated in U.S. dollars and are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

2. Summary of Significant Accounting Policies

Consolidation

The consolidated financial statements include the accounts of Nicholas Financial – Canada and its wholly owned subsidiaries, NDS, NFI, and NF Funding I, collectively referred to as the “Company”. All intercompany transactions and balances have been eliminated.

Segment Reporting

The Company reports operating segments in accordance with FASB Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and assesses performance. FASB ASC Topic 280 requires that a public enterprise report a measure of segment profit or loss, certain specific revenue and expense items, segment assets, information about the way the operating segments where determined and other items.

The Company has one reportable segment, which is the consumer finance company.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses on finance receivables.

Restricted Cash

Restricted cash includes cash and cash equivalents for which the Company’s ability to withdraw funds is contractually limited. The Company’s restricted cash consist of cash restricted for debt serving of the Company’s variable interest entity.

Finance Receivables

Finance receivables are recorded at cost, net of unearned dealer discounts, unearned insurance and commissions (see “Revenue Recognition”), and the allowance for credit losses (See Note 3). Beginning in the fiscal year ended March 31, 2019, the Company ceased capitalizing compensation to the dealers. This change resulted in an increase in marketing expenses of approximately $1.0 million for the fiscal year ended March 31, 2019.

Allowance for Credit Losses

During the first quarter of the fiscal year ended March 31, 2019, the Company began using the trailing six-month net charge-off percentage, annualized, and applied to ending finance receivables to calculate the allowance for credit losses. This change was made to reflect changes in the Company’s lending policies and underwriting standards, which resulted from the Company changing its business strategies. The Company re-focused on financing primary transportation to and from work for the subprime borrower. This change resulted in purchasing higher yielding loans, with smaller amounts financed and shorter monthly terms. A trailing six-month, annualized, is also more in line with the industry practice, which uses a trailing twelve-month. Management believes a trailing six-month will more accurately reflect changes in the portfolio. Using the prior method (discussed below), the allowance and provision expense for the first quarter of fiscal 2019 would have been approximately $151,000 lower.

Repossessed Assets

Repossessed assets are stated at net realizable value and consist primarily of automobiles that have been repossessed by the Company and are awaiting final disposition. Most costs associated with repossession, transport, and auction preparation expenses are reported under operating expenses in the period in which they are incurred.

Property and Equipment

Property and equipment is recorded at cost, net of accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets as follows:

Automobiles 3 years

Equipment 5 years

Furniture and fixtures 7 years

Software 7 years

Goodwill

Goodwill represents the excess of the cost of net assets acquired in business combinations over the fair value of identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Goodwill impairment exists when the fair value of a reporting unit is less than the carrying value. Goodwill is tested for impairment annually, as of the last day of the fiscal year, or more frequently whenever events or changes in circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill is tested for impairment at the reporting unit level. The Company has one reporting unit, which is the same level as the Company’s one operating segment, the consumer finance company. The Company has the option of either assessing qualitative factors to determine whether it is more likely than not that the carrying value of our reporting unit exceeds its fair value or proceeding directly to a quantitative test. The Company elected to perform the quantitative impairment test at March 31, 2020.

The quantitative impairment test compares the fair value of the reporting unit to its carrying value, including goodwill. The fair value of a reporting unit refers to the price that would be received to sell the reporting unit in an orderly transaction between market participants at the measurement date. Quoted market prices in active markets are the best evidence of fair value and shall be used as the basis for the measurement, if available. If the fair value exceeds its carrying value, the goodwill of the reporting unit is not considered impaired. However, if the carrying value of the reporting unit exceeds its fair value, the Company recognizes an impairment loss equal to that excess.

As the Company only has one reporting unit, the Company estimated the fair value of the reporting unit using a market based approach, with the primary input being the Company’s market capitalization at the measurement date, adjusted for a control premium. Based upon the impairment test at March 31, 2020, the Company concluded that its recorded balance of goodwill was impaired and recorded an impairment charge of $0.3 million, which resulted in a full write-off of the Company’s goodwill balance (See Note 5).

Impairment of Long-Lived Assets

The Company assesses impairment of long-lived assets, including property and equipment and intangible assets, whenever changes or events indicate that the carry amount may not be recoverable. The Company assesses impairment of these assets generally at the branch level based on profitability of the branch and the Company’s plans for branch closings. The Company will write down such assets to fair value, based on operational results, if impairment has occurred. The Company did not record any impairment charges for the long-lived assets for the fiscal year ended 2020 or 2019.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases along with operating loss and tax credit carryforwards, if any. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date.

The Company recognizes tax benefits from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from any such position would be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. It is the Company’s policy to recognize interest and penalties accrued on any uncertain tax benefits as a component of income tax expense. There were no unrecognized tax positions as of March 31, 2020 or 2019.

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions the Company is no longer subject to U.S. federal and state tax examinations for fiscal years prior to 2016.

We are subject to taxation at the federal, state, and local levels in the United States. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“TCJA”). The changes included in TCJA are broad and complex. The final transition impacts of TCJA may differ from the estimates provided elsewhere in this Annual Report, possibly materially, due to, among other things, changes in interpretations of TCJA, any legislative action to address questions that arise because of TCJA, any changes in accounting standards for income taxes or related interpretations in response to TCJA, or any updates or changes to estimates the Company has utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates. The estimated impact of the new law is based on management’s current knowledge and assumptions and recognized impacts could be materially different from current estimates.

The effect on deferred taxes of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. See Note 7 for details regarding the impact of Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) by the U.S. government on March 27, 2020.

Revenue Recognition

Interest income on finance receivables is recognized using the interest method. Accrual of interest income on finance receivables is suspended when a loan is contractually delinquent for 61 days or more, or the collateral is repossessed, whichever is earlier. The Company reverses the accrual of interest income when the loan is contractually delinquent 61 days or more.

As of March 2019, non-performing assets, defined as 61 or more days past due, a Chapter 7 bankruptcy account, or a Chapter 13 bankruptcy that has not been confirmed by the courts, for which the accrual of interest income is suspended. Upon confirmation of a bankruptcy chapter 13 (BK13), the account is charged-off. Upon notification of a bankruptcy chapter 7, an account is monitored for collection. In the event the debtors’ balance is reduced by the bankruptcy court, the Company will record a loss equal to the amount of principal balance reduction. The remaining balance will be reduced as payments are received. In the event an account is dismissed from bankruptcy, the Company will decide, based on several factors, to begin repossession proceedings or to allow the customer to begin making regularly scheduled payments (see Note 3).

A dealer discount represents the difference between the finance receivable of a Contract, and the amount of money the Company actually pays for the Contract. The discount negotiated by the Company is a function of the lender, the wholesale value of the vehicle, and competition in any given market. In making decisions regarding the purchase of a particular Contract, the Company considers the following factors related to the borrower: place and length of residence; current and prior job status; history in making installment payments for automobiles; current income; and credit history. In addition, the Company examines its prior experience with Contracts purchased from the dealer from which the Company is purchasing the Contract, and the value of the automobile in relation to the purchase price and the term of the Contract. The dealer discount is amortized as an adjustment to yield using the interest method over the life of the loan. The average dealer discount, as a percent of the amount financed, associated with new volume for the fiscal years ended March 31, 2020 and 2019, were 7.9% and 8.2%, respectively.

Unearned insurance and fee commissions consist primarily of commissions received from the sale of ancillary products. These products include automobile warranties, roadside assistance programs, accident and health insurance, credit life insurance, involuntary unemployment insurance, and forced placed automobile insurance. These commissions are amortized over the life of the Contract using the interest method.

Income (Loss) Per Share

The Company has granted stock compensation awards with nonforfeitable dividend rights which are considered participating securities. Earnings (loss) per share is calculated using the two-class method, as such awards are more dilutive under this method than the treasury stock method. Ordinarily, basic earnings per share is calculated by dividing net income allocated to common shareholders by the weighted average number of common shares outstanding during the period, which excludes the participating securities. Ordinarily, diluted loss per share includes the dilutive effect of additional potential common shares from stock compensation awards. For the year ended March 31, 2020, Company experienced net income. For the year ended March 31, 2019, the Company experienced net loss, which is not allocated to participating securities as their effect is antidilutive. Income (loss) per share has been computed based on the following weighted average number of common shares outstanding:

Fiscal Year ended March 31, (In thousands, except earnings per share numbers)

Numerator:

Less: Allocation of income (loss) to participating securities (32 ) —

Net income (loss) allocated to common stock $ 3,434 $ (3,648 )

Basic income (loss) per share computation:

Net income (loss) allocated to common stock $ 3,434 $ (3,648 )

Less: Weighted average participating securities outstanding (72 ) —

Weighted average shares of common stock 7,702 7,861

Basic income (loss) per share $ .45 $ (0.46 )

Diluted income (loss) per share computation:

Income (loss) allocated to common stock $ 3,434 $ (3,648 )

Undistributed earnings re-allocated to participating securities 32 —

Numerator for diluted income (loss) per share $ 3,466 $ (3,648 )

Incremental shares from stock options 1 —

Weighted average shares and dilutive potential common shares 7,703 7,861

Diluted income (loss) per share $ .45 $ (0.46 )

Diluted income (loss) per share does not include the effect of certain stock options as their impact would be anti-dilutive. Approximately68,600 stock options were not included in the computation of diluted loss per share for the year ended March 31, 2019, because their effect would have been anti-dilutive.

Share-Based Payments

The grant date fair value of share awards is recognized in earnings over the requisite service period (presumptively, the vesting period), net of estimated forfeitures. The Company estimates the fair value of option awards using the Black-Scholes option pricing model. The risk-free interest rate is based upon a U.S. Treasury instrument with a life that is similar to the expected term of the options. Expected volatility is based upon the historical volatility for the previous period equal to the expected term of the options. The expected term is based upon the average life of previously issued options. The expected dividend yield is based upon the yield expected on date of grant to occur over the term of the option.

The fair value of non-vested restricted shares and performance units are measured at the market price of a share on a grant date. Restricted shares have a three-year service period. Performance units include a performance period (generally ending at the end of the fiscal year in which the units were granted) followed by a two-year service period. At the end of the performance period, these units effectively become restricted shares for the remaining two-year service period at which time they become vested.

Fair Value Measurements

The Company measures specific assets and liabilities at fair value, which is an exit price, representing the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. When applicable, the Company utilizes market data or assumptions that market participants would use in pricing the asset or liability under a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions (see Note 7).

Financial Instruments and Concentrations

The Company’s financial instruments consist of cash, finance receivables (accrued interest receivable is a part of finance receivables), and a Credit Facility. Financial instruments that are exposed to concentrations of credit risk are primarily finance receivables and cash.

For the year ended, March 31, 2020, the Company operated in 16 states through 43 branch locations. Of the finance receivables total as of March 31, 2020, Florida represented 29%, North Carolina represented 13%, Ohio represented 12%, and Georgia represented 10%. Of the remaining states, no one state represented more than 5% of the total finance receivables. The Company provides credit during the normal course of business and performs ongoing credit evaluations of its customers.

The Company maintains reserves for potential credit losses which, when realized, have been within the range of management’s expectations. The Company perfects a primary security interest in all vehicles financed as a form of collateral.

The combined account balances the Company maintains at financial institutions typically exceed federally insured limits, and there is a concentration of credit risk related to accounts on deposit in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes this risk of loss is not significant.

Variable Interest Entity

In March 2019, the Company entered into a new senior secured credit facility collateralized by customer financed receivables by transferring the receivables into a bankruptcy-remote variable interest entity (VIE). Under the terms of the transaction, all cash collections and other cash proceeds of the customer receivables go first to the servicer and the holders of the asset-backed notes, and then to the residual equity holder. The Company retained the servicing of the portfolio and receives a monthly fee of 2.5% (annualized) based on the outstanding balance of the financed receivables, and the Company currently holds all of the residual equity, monthly fees are eliminated in the consolidated financial statements. In addition, the Company, rather than the VIE, will retain certain credit insurance income together with certain recoveries related to credit insurance and on charge-offs of the financed receivables, which will continue to be reflected as a reduction of net charge-offs on a consolidated basis for as long as the Company consolidates the VIE.

The Company consolidated the VIE’s when the Company determines that it is the primary beneficiary, the Company has the power to direct the activities that most significantly impact the performance of the VIE and it has the obligation to absorb losses and has the right to receive residual returns is significant.

Statements of Cash Flows

Cash paid for income taxes for the years ended March 31, 2020 and 2019 was approximately $6 thousand and $44 thousand, respectively. Cash paid for interest, including debt origination costs for the years ended March 31, 2020 and 2019 was approximately $8.2 million and $11.6 million, respectively.

Reclassifications

Certain prior-period amounts have been reclassified to conform to the current presentation. Such reclassifications had no impact on previously reported net loss or shareholders’ equity.

Recently Adopted Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates Step 2 from the goodwill impairment test. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. The amendments in this update are effective for public entities who are SEC filers for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company adopted the guidance on March 31, 2020 and applied it to the Company’s goodwill impairment test at March 31, 2020 (See Note 5).

In February 2016, the FASB issued ASU No. 2016-02, “Leases”, intended to improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. “The ASU will require organizations that lease assets—referred to as “lessees”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The accounting by organizations that own the assets leased by the lessee—also known as lessor accounting—will remain largely unchanged from current U.S. GAAP. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Upon adoption, the Company added the impact of the full operating lease terms, using the present value of future minimum lease payments to the balance sheet. The Company adopted the guidance on April 1, 2019 and the adoption of this guidance did not have a material impact on its Consolidated Financial Statements.

Recent Accounting Pronouncements

In June 2016, the FASB issued the ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Among other things, the amendments in this ASU require the measurement of all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss

estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. The ASU also requires additional disclosures related to estimates and judgments used to measure all expected credit losses. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Recently, the FASB voted to delay the implementation date for this accounting standard, for smaller reporting companies, the new effective date is beginning after December 15, 2022, and early adoption is permitted. The Company is currently evaluating the impact of the adoption of this ASU on the consolidated financial statements and is collecting and analyzing data that will be needed to produce historical inputs into any models created as a result of adopting this ASU. At this time, the Company believes the adoption of this ASU will likely have a material effect and is expected to increase the overall allowance for credit losses.

The Company does not believe there are any other recently issued accounting standards that have not yet been adopted that will have a material impact on the Company’s consolidated financial statements.

3. Finance Receivables

Finance receivables consist of Contracts and Direct Loans, each of which comprise a portfolio segment. Each portfolio segment consists of smaller balance homogeneous loans which are collectively evaluated for impairment.

The Company purchases individual Contracts from used and new automobile dealers in its markets. There is no relationship between the Company and the dealer with respect to a given Contract once the assignment of that Contract is complete. The dealer has no vested interest in the performance of any Contract the Company purchases. In March 2019, the Company changed its charge off policy from 181 days past due to 121 days past due. In addition, Chapter 13 Bankruptcies, once confirmed by the courts, are also charged off. This policy change resulted in a one-time charge of approximately $6.4 million during the 4th quarter of fiscal 2019. This policy change was made because current management believes it is more in line with industry standards, considering the sub-prime nature of our customers. In the event of repossession, the charge-off will occur after standard collection practices by the Company, as determined by the residency state of a customer. This practice is consistent with the sub-prime industry.

Contracts and Direct Loans included in finance receivables are detailed as follows as of fiscal years ended March 31:

(In thousands)

Unearned insurance and fee commissions (2,616 ) (2,826 )

Purchase price discount (915 ) -

Contracts

The Company purchases Contracts from automobile dealers at a negotiated price that is less than the original principal amount being financed by the purchaser of the automobile. The Contracts are predominantly for used vehicles. As of March 31, 2020, the average model year of vehicles collateralizing the portfolio was a 2011 vehicle. The terms of the Contracts range from 12 to 60 months and bear an average contractual interest rate of 22.6% and 22.7% as of March 31, 2020 and 2019, respectively.

Direct Loans

Direct Loans are typically for amounts ranging from $1,000 to $15,000 and are generally secured by a lien on an automobile, watercraft or other permissible tangible personal property. The majority of Direct Loans are originated with current or former customers under the Company’s automobile financing program. The typical Direct Loan

represents a better credit risk than Contracts due to the customer’s historical payment history with the Company; however, the underlying collateral is less valuable. In deciding whether or not to make a loan, the Company considers the individual’s credit history, job stability, income, and impressions created during a personal interview with a Company loan officer. Additionally, because most of the Direct Loans made by the Company to date have been made to borrowers under Contracts previously purchased by the Company, the payment history of the borrower under the Contract is a significant factor in making the loan decision. As of March 31, 2020, loans made by the Company pursuant to its Direct Loan program constituted approximately 5% of the aggregate principal amount of the Company’s loan portfolio. The terms of the Direct Loans range from 12 to72 months and bear an average contractual interest rate of 27.3% and 26.0% as of March 31, 2020 and 2019, respectively.

Allowance for Credit Losses

During the first quarter of the fiscal year ended March 31, 2019, the Company began using the trailing six-month net charge-off percentage, annualized, and applied to ending finance receivables to calculate the allowance for credit losses. This change was made to reflect changes in the Company’s lending policies and underwriting standards, which resulted from the Company changing its business strategies. The Company re-focused on financing primary transportation to and from work for the subprime borrower. This change resulted in purchasing higher yielding loans, with smaller amounts financed and shorter monthly terms. A trailing six-month, annualized, is also more in line with the industry practice, which uses a trailing twelve-month. Management believes a trailing six-month will more accurately reflect changes in the portfolio.

The following presents the activity in our allowance for credit losses, shown below and on the next page:

For the year ended March 31, 2020

(In thousands)

Indirect Direct Total

For the year ended March 31, 2019

(In thousands)

Indirect Direct Total

A performing account is defined as an account that is less than 61 days past due. The Company defines an automobile contract as delinquent when more than 25% of a payment contractually due by a certain date has not been paid by the immediately following due date, which date may have been extended within limits specified in the servicing agreements or as a result of a deferral. The period of delinquency is based on the number of days payments are contractually past due, as extended where applicable.

In certain circumstances, the Company will grant obligors one-month payment extensions. The only modification of terms in those circumstances is to advance the obligor’s next due date by one month and extend the maturity date of the receivable. There are no other concessions, such as a reduction in interest rate, forgiveness of principal or of accrued interest. Accordingly, the Company considers such extensions to be insignificant delays in payments rather than troubled debt restructurings.

A non-performing account is defined as an account that is contractually delinquent for 61 days or more or is a Chapter 13 bankruptcy account, and the accrual of interest income is suspended. As of February 2019, the Company changed the charge-off policy from 181 days contractually delinquent to 121 days contractually delinquent. This change aligned the Company’s charge-off policy with practices within the subprime auto financing segment. See “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more details.

In the event an account is dismissed from bankruptcy, the Company will decide, based on several factors, to begin repossession proceedings or to allow the customer to begin making regularly scheduled payments.

The following table is an assessment of the credit quality by creditworthiness as of March 31:

(In thousands)

Contracts Direct Loans Total Contracts Direct Loans Total

The following tables present certain information regarding the delinquency rates experienced by the Company with respect to Contracts and Direct Loans, excluding any Chapter 13 bankruptcy accounts:

(In thousands)

4. Property and Equipment

Property and equipment as of March 31, 2020 and 2019 is summarized as follows:

(In thousands)

Cost Accumulated Depreciation Net Book Value

5. Goodwill and Intangibles

On April 30, 2019, the Company completed an acquisition of three branches, representing substantially all of the assets, of ML Credit Group, LLC (d/b/a Metrolina Credit Company) (“Metrolina”). Two acquired branches are located in the state of North Carolina and one branch is located in South Carolina. Based on its evaluation of the agreement, the Company accounted for the acquisition as a business combination. The Company allocated the purchase price to the acquired assets and liabilities based on their fair values. As of March 31, 2020, the accounting related to this acquisition was completed by the Company. The final determination of the fair value of the customer lists and goodwill were completed within the twelve-month measurement period from the date of the acquisition as required by FASB ASC Topic 805-10-25. The Company recorded the following assets and liabilities in its accounting for this acquisition and the changes in the carrying amount of goodwill, are as shown on the next page.

As of

Acquisitions:

Number of branches acquired through business combinations 3

Tangible assets:

Finance receivable, net 20,097

Other assets 144

Assumed liabilities (160 )

Total net tangible assets 20,081

Excess of purchase prices over carrying value of net tangible assets $ 402

Indirect dealer network relationships $ 64

Direct customer relationships 43

Total goodwill and intangible assets $ 402

For year ended

Balance as of April 1, 2019 $ -

Goodwill acquired during the year 295

Goodwill impairment charge (295 )

Balance as of March 31, 2020 $ -

The Company completed the annual impairment test for goodwill at the reporting unit level pursuant to Accounting Standards Codification (“ASC”) 350 – Intangibles – Goodwill and Other (ASC 350), as amended by ASU 2017-04, which the Company adopted during the current year A reporting unit is defined under GAAP as the operating segment, or one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by segment management. Our single operating segment comprises a single reporting unit, based on the level at which segment management regularly reviews and measures the business operating results. The Company has one operating segment, which is the consumer finance company.

ASC 350 requires the Company to test goodwill for impairment annually and more frequently if indicators of impairment exist. Testing goodwill for impairment requires management to compare the fair value of a reporting unit with its carrying amount, including goodwill. While the qualitative assessment may change how goodwill impairment testing is performed, it does not affect the timing or measurement of goodwill impairment.

ASC 350 also provides for an optional qualitative assessment for testing goodwill for impairment (qualitative assessment) that may allow the Company to skip the annual quantitative impairment test. The qualitative assessment permits companies to assess whether it is more likely than not (i.e., a likelihood of greater than 50%) that the fair value of a reporting unit is less than its carrying amount.

The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date, which is March 31, 2020. Quoted market prices in active markets are the best evidence of fair value and shall be used as the basis for the measurement, if available.

The fair value of a reporting unit is the amount at which the unit as a whole could be sold in a current transaction between willing parties (i.e., other than in a forced or liquidation sale). If a public company has only one reporting unit (or a company owns a publicly traded subsidiary that represents a reporting unit), then the market capitalization of the public company (or its public subsidiary) provides certain evidence about the fair value of that reporting unit.

During the year ended March 31, 2020, the Company experienced a significant decrease in stock prices, which was significant driver of the goodwill impairment charge. As of March 31, 2020, the closing stock price was $5.84, and the fiscal year monthly average share price was $8.51. The total number of common shares outstanding was approximately 7.8 million for the period ending, March 31, 2020. Based upon the impairment test at March 31, 2020, the Company concluded that the reporting unit fair value, adjusted for a control premium, was less than the carrying amount of the reporting unit of $107.6 million. The goodwill impairment loss recognized was $0.3 million, which is limited to the total amount of goodwill allocated to the reporting unit.

Definite-lived intangible assets principally consist of customer-related assets including contract indirect dealer network relationships and direct customer relationships. These assets are amortized over their estimated useful lives and evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The evaluation compares the cash inflows expected to be generated from each intangible asset to its carrying value. If cash flows attributable to the intangible asset are less than the carrying value, the asset is considered impaired and written down to its estimated fair value. No material impairments of definite-lived intangible assets have been recognized in the periods presented in the consolidated financial statements.

For the twelve months ended as of March 31, 2020, the Company incurred approximately $278,000 in expenses related to the purchase of the Metrolina assets.

6. Credit Facility

Senior Secured Credit Facility

On March 29, 2019, NF Funding I, a wholly-owned, special purpose financing subsidiary of NFI entered into a senior secured credit facility (the “Credit Facility”) pursuant to a credit agreement with Ares Agent Services, L.P., as administrative agent and collateral agent, and the lenders that are party thereto (the “Credit Agreement”). The Company’s prior credit facility was paid off in connection with this Credit Facility.

Pursuant to the Credit Agreement, the lenders have agreed to extend to the NF Funding I a line of credit of up to $175,000,000, which will be used to purchase motor vehicle retail installment sale contracts from NFI on a revolving basis pursuant to a related receivables purchase agreement between NF Funding I and NFI (the “Receivables Purchase Agreement”). Under the terms of the Receivables Purchase Agreement, NFI will sell to NF Funding I the receivables under the installment sale contracts. NFI will continue to service the motor vehicle retail installment sale contracts transferred to NF Funding I pursuant to a related servicing agreement (the “Servicing Agreement”).

The availability of funds under the Credit Facility is generally limited to 82.5% of the value of non-delinquent receivables, and outstanding advances under the Credit Facility will accrue interest at a rate of LIBOR plus 3.75%. The commitment period for advances under the Credit Facility is three years. At the end of the commitment period, the outstanding balance will convert to a term loan and require monthly principal and interest payments over a four-year amortization period.

In connection with the Credit Facility, NFI has guaranteed the NF Funding I’s obligations under the Credit Agreement up to 10% of the highest aggregate principal amount outstanding under the Credit Agreement at any time pursuant to the Limited Guaranty. The Company is also obligated to cover any losses of the lender parties resulting from certain “bad acts” of the Company or its subsidiaries, such as fraud, misappropriation of funds or unpermitted disposition of the assets.

Pursuant to a related security agreement (the “Security Agreement”), NF Funding I granted a security interest in substantially all of its assets as collateral for its obligations under the Credit Facility. In addition, NFI pledged the equity interests of NF Funding I as additional collateral.

The Credit Agreement and the other loan documents contain customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, and sales of receivables. If an event of default occurs, the lenders could increase borrowing costs, restrict the NF Funding I’s ability to obtain additional advances under the Credit Facility, accelerate all amounts outstanding under the Credit Facility, enforce their interest against collateral pledged under the Credit Facility or enforce their rights under the Company’s guarantees.

Once sold to the NF Funding I, the assets described above will be separate and distinct from the Company’s own assets and will not be available to its creditors should the Company become insolvent, although they will be presented on a consolidated basis on the Company’s balance sheet.

Future maturities of debt as of March 31, 2020 are as follows:

(in thousands)

Year Ended March 31,

7. Fair Value Disclosures

Financial Instruments Not Measured at Fair Value

The Company’s financial instruments consist of cash and restricted cash, finance receivables, repossessed assets, and the Credit Facility. For the cash and the credit facility, the carrying value approximates fair value.

Finance receivables, net, approximates fair value based on the price paid to acquire Contracts. The price reflects competitive market interest rates and purchase discounts for the Company’s chosen credit grade in the economic environment. This market is highly liquid as the Company acquires individual loans on a daily basis from dealers.

The initial terms of the Contracts generally range from 12 to 72 months. Beginning in December 2017, the maximum initial term of a Contract was reduced to 60 months. The initial terms of the Direct Loans generally range from 12 to 60 months. If liquidated outside of the normal course of business, the amount received may not be the carrying value.

Repossessed assets are valued at the lower of the finance receivable balance prior to repossession or the estimated net realizable value of the repossessed asset. The Company estimates the net realizable value using the projected cash value upon liquidation plus insurance claims outstanding, if any.

Based on current market conditions, any new or renewed credit facility would contain pricing that approximates the Company’s current Credit Facility. Based on these market conditions, the fair value of the Credit Facility as of March 31, 2019 was estimated to be equal to the book value. The interest rate for the Credit Facility is a variable rate based on LIBOR pricing options.

Fair Value Measurement Using (In thousands) Fair Carrying

Description Level 1 Level 2 Level 3 Value Value

Cash and restricted cash:

Finance receivables:

Repossessed assets:

Credit facility:

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as a Level 3.

8. Income Taxes

The provision for income taxes (income tax benefits) consists of the following for the years ended March 31:

(In thousands)

Current:

Deferred:

Income tax benefit $ (1,219 ) $ (940 )

The net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes are reflected in deferred income taxes. Significant components of the Company’s deferred tax assets consist of the following as of March 31:

(In thousands)

Share-based compensation 320 276

Federal and state net operating loss carryforwards 458 2,293

Right of use liability 462 -

Deferred tax liabilities

Right of use asset 457 -

Total deferred tax liabilities 528 77

The provision (benefit) for income taxes reflects an effective U.S tax rate, which differs from the corporate tax rate for the following reasons:

(In thousands)

Provision (benefit) for income taxes at Federal statutory rate $ 479 $ (845 )

Increase (decrease) resulting from:

Federal Fiscal Year 2020 NOL rate differential (414 ) -

Federal Fiscal Year 2019 NOL rate differential (1,362 ) -

State income taxes, net of Federal benefit 91 (206 )

Tax Reform – Rate Change - 160

Income tax expense (benefit) $ (1,219 ) $ (940 )

The Company’s effective tax rate decreased to (54.3)% in fiscal 2020 from 20.5% in fiscal 2019, resulting from the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

In response to the global impacts of COVID-19 on U.S. companies and citizens, the government enacted the CARES Act on March 27, 2020. The CARES Act included several tax relief options for companies, which resulted in the following provisions available to the Company.

•In May 2020, the Company elected to carryback its fiscal year 2019 net operating losses of $9.7 million to 2013, thus generating a refund of $3.5 million and an income tax benefit of $1.4 million. The tax benefit is the result of the federal income tax rate differential between the current statutory rate of 21% and the 35% rate applicable to 2013.

•The Company plans to carryback its fiscal year 2020 net operating losses of $3.0 million to 2014, thus generating an anticipated refund of $1.0 million and an income tax benefit of $0.4 million. The tax benefit is the result of the federal income tax rate differential between the current statutory rate of 21% and the 35% rate applicable to 2014.

Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective positive evidence evaluated was the cumulative pre-tax income over the three-year period ended March 31, 2020, cumulative pre-tax income for the next three years, and substantial federal NOL rate differentials, previously noted. As of

March 31, 2020, a valuation allowance was not required. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income are reduced.

The Company considers the earnings of the Company’s U.S. subsidiaries to be indefinitely invested outside Canada on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and the Company’s specific plans for reinvestment of those subsidiary earnings. The Company has not recorded a deferred tax liability related to the Canadian income taxes and U.S. withholding taxes on approximately $144.2 million of undistributed earnings of the U.S. subsidiaries indefinitely invested outside Canada. If the Company decided to repatriate the U.S. earnings, it would need to adjust its income tax provision in the period the Company determined that the earnings will no longer be indefinitely invested outside of Canada.

9. Leases

The Company adopted a new lease accounting standard in April 2019. See Note 2, “Summary of Significant Accounting Policies,” for an overview of the transition to this standard.

The Company maintains lease agreements related to its branch network and for its corporate headquarters. The branch lease agreements range from one to five years and generally contain options to extend from one to three years. The corporate headquarters lease agreement expires in April 2020 and the Company is in the process of negotiating a new lease agreement. All of the Company’s lease agreements are considered operating leases. None of the Company’s lease payments are dependent on a rate or index that may change after the commencement date, other than the passage of time.

The Company’s lease liability was $2.7 million as of March 31, 2020. This liability is based on the present value of the remaining minimum rental payments using a discount rate that is determined based on the Company’s incremental borrowing rate on its senior revolving credit facility. The lease asset was $2.6 million as of March 31, 2020.

The Company has made several policy elections related to lease assets and liabilities. The Company elected to utilize the package of transition practical expedients, which includes not reassessing the following at adoption: (i) whether existing contracts contained leases, (ii) the existing classification of leases as operating or financing, or (iii) the initial direct costs of leases. In addition, the Company did not use hindsight to determine the lease term or include options to extend for leases existing at the transition date.

The Company had elected the practical expedient of combining lease and non-lease components for its real estate leases in calculating the present value of the fixed payments without having to perform an allocation between the types of lease components. Future minimum lease payments under non-cancellable operating leases in effect as of March 31, 2020, are as follows:

in thousands

Total future minimum lease payments 3,036

Present value adjustment (384 )

Operating lease liability $ 2,652

The following table reports information about the Company’s lease cost for the twelve months ended March 31, 2020 (in thousands):

Lease cost:

Operating lease cost $ 1,777

Variable lease cost 435

Total lease cost $ 2,212

The following table reports other information about the Company’s leases for the twelve months ended March 31, 2020 (dollar amounts in thousands):

Other Lease Information

Operating Lease - Operating Cash Flows (Fixed Payments) $ 1,913

Operating Lease - Operating Cash Flows (Liability Reduction) $ 1,841

Weighted Average Lease Term - Operating Leases 2.5 years

Weighted Average Discount Rate - Operating Leases 6.5%

Rent expense for the fiscal years ended March 31, 2020 and 2019 was approximately $2.2 million and $2.6 million, respectively. The Company recognizes rent expense on a straight-line basis over the term of the lease, taking into account, when applicable, lessor incentives for tenant improvements, periods where no rent payment is required and escalations in rent payments over the term of the lease.

10. Share-Based Payments

The Company has share awards outstanding under two share-based compensation plans (the “Equity Plans”). The Company believes that such awards generally align the interests of its employees with those of its shareholders. Under the shareholder-approved 2006 Equity Incentive Plan (the “2006 Plan”) the Board of Directors was authorized to grant option awards for up to approximately 1.1 million common shares. On August 13, 2015, the Company’s shareholders approved the Nicholas Financial, Inc. Omnibus Incentive Plan (the “2015 Plan”) for employees and non-employee directors. Under the 2015 Plan, the Board of Directors is authorized to grant total share awards for up to 750,000 common shares. Awards under the 2006 Plan will continue to be governed by the terms of that plan. The 2015 Plan replaced the 2006 Plan; accordingly, no additional option awards may be granted under the 2006 Plan. In addition to option awards, the 2015 Plan provides for restricted stock, restricted stock units, performance shares, performance units, and other equity-based compensation.

Option awards previously granted to employees and directors under the 2006 Plan generally vest ratably based on service over a five- and three-year period, respectively, and generally have a contractual term of ten years. Vesting and contractual terms for option awards under the 2015 Plan are essentially the same as those of the 2006 Plan. Restricted stock awards generally cliff vest over a three-year period based on service conditions. Vesting of performance units generally does not commence until the attainment of Company-wide performance goals including annual revenue growth and operating income targets. There are no post-vesting restrictions for share awards.

The Company funds share awards from authorized but unissued shares and does not purchase shares to fulfill its obligations under the Equity Plans. Cash dividends, if any, are not paid on unvested performance units or unexercised options but are paid on unvested restricted stock awards.

The Company did not grant any options during the years ended March 31, 2020 or 2019.

A summary of option activity under the Equity Plans as of March 31, 2020, and changes during the year are presented below.

(Shares and Aggregate Intrinsic Value in thousands)

Granted — —

The total intrinsic value of options exercised during the years ended March 31, 2020 and 2019 was approximately $7,000 and $98,000, respectively.

During the fiscal year ended March 31, 2020, approximately 2,000 options were exercised at exercise prices ranging from $1.20 to $4.18 per share. During the same period, approximately 8,000 options were forfeited at exercise prices ranging from $10.87 to $12.68 per share.

During the fiscal year ended March 31, 2019, approximately 12,000 options were exercised at exercise prices ranging from $0.77 to $4.18 per share. During the same period, approximately 67,000 options were forfeited at exercise prices ranging from $10.87 to $14.36 per share.

Cash received from options exercised during the fiscal years ended March 31, 2020 and 2019 totaled approximately $5,000 and $16,000, respectively. As of March 31, 2020, the Company had no unrecognized compensation related to options grants. For the year ended, March 31, 2020 and March 31, 2019, respectively, the Company had approximately $0 and $10,000 of total unrecognized compensation cost related to options granted.

A summary of the status of the Company’s non-vested restricted shares under the Equity Plan as of March 31, 2020, and changes during the year then ended is presented below.

(Shares and Aggregate Intrinsic Value in thousands)

The Company awarded approximately 39,000 restricted shares during the fiscal year ended March 31, 2020. There are no performance shares included within the 39,000 restricted shares granted that resulted from the Company meeting a performance threshold. During the same period there were approximately 26,000 restricted shares forfeited. With the adoption of ASU 2016-09 on January 1, 2017, the Company no longer reduces stock-based compensation by estimated forfeitures. Instead the Company accounts for forfeitures when they occur. For any vesting tranche of an award, the cumulative amount of compensation cost recognized is at least equal to the portion of the grant‐date value of the award tranche that is actually vested at that date.

As of March 31, 2020, there was approximately $208,000 of total unrecognized compensation cost related to non-vested restricted share awards granted under the Equity Plans. That cost is expected to be recognized over a weighted-average period of approximately 1.4 years.

11. Employee Benefit Plan

The Company has a 401(k)-retirement plan under which all employees are eligible to participate. Employee contributions are voluntary and subject to Internal Revenue Service limitations. The Company did not make a discretionary matching employee contribution. The Board will re-evaluate the Company’s matching policy for plan year 2020 later in the year.

12. Commitments and Contingencies

The Company currently is not a party to any pending legal proceedings other than ordinary routine litigation incidental to its business, none of which, if decided adversely to the Company, would, in the opinion of management, have a material adverse effect on the Company’s financial condition or results of operations.

13. Variable Interest Entity

financed receivables, and the Company currently holds all of the residual equity. In addition, the Company, rather than the VIE, will retain certain credit insurance income together with certain recoveries related to credit insurance and on charge-offs of the financed receivables, which will continue to be reflected as a reduction of net charge-offs on a consolidated basis for as long as the Company consolidates the VIE.

The assets of the VIE serve as collateral for the obligations of the VIE. The lender has no recourse to assets outside of the VIE.

The following table presents the assets and liabilities held by the VIE (for legal purposes, the assets and the liabilities of the VIE will remain distinct from the Company):

Assets

Repossessed assets 1,277 -

Liabilities

Accounts payable and accrued expenses 597 -

14. Stock Plans

In May 2019, the Company’s Board of Directors (“Board”) authorized a new stock repurchase program allowing for the repurchase of up to $8.0 million of the Company’s outstanding shares of common stock in open market purchases, privately negotiated transactions, or through other structures in accordance with applicable federal securities laws. The authorization was effective immediately.

The timing and actual number of sharers will depend on a variety of factors, including stock price, corporate and regulatory requirements and other market and economic conditions. The Company’s stock repurchase program may be suspended or discontinued at any time.

In August 2019, the Company’s Board authorized additional repurchase of up to $1.0 million of the Company’s outstanding shares.

The table below summarizes treasury share transactions under the Company’s stock repurchase program.

Twelve months ended March 31, (In thousands)

Number of Shares Amount Number of Shares Amount

Treasury shares purchased 119 (979 ) - -

15. Subsequent Events

Paycheck Protection Program: On May 27, 2020, the Company obtained a loan in the amount of $3,243,900 from Fifth Third Bank in connection with the U.S. Small Business Administration’s Paycheck Protection Program (the “PPP Loan”). Pursuant to the Paycheck Protection Program, all or a portion of the PPP Loan may be forgiven if the Company uses the proceeds of the PPP Loan for its payroll costs and other expenses in accordance with the requirements of the Paycheck Protection Program. The Company intends to use the proceeds of the PPP Loan for payroll costs and other covered expenses and intends to seek full forgiveness of the PPP Loan as soon as permitted under the Paycheck Protection Program.

If the PPP Loan is not fully forgiven, the Company will remain liable for the full and punctual payment of the outstanding principal balance plus accrued and unpaid interest. The PPP Loan accrues interest at a rate per annum equal to 1.00% and an initial payment of accrued and unpaid interest is due on December 27, 2020. The outstanding principal balance plus accrued and unpaid interest is due on May 27, 2022. The PPP Loan is unsecured. The PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. The Promissory Note contains events of default and other provisions customary for a loan of this type.

Point Predictive, Inc.: On June 10th 2020 Point Predictive Inc., the San Diego-based company that provides machine learning solutions to lenders, announced today that Nicholas Financial has selected the company’s risk scoring solutions to help them better segment high and low risk applications to improve the customer and dealer experience during the financing process.

Share Repurchases: For the period April 1, 2020 through June 21, 2020, the Company repurchased an additional 4,712 shares of our common stock for $27 thousand at an average price of $5.82 per share. The total shares repurchased through June 21, 2020 under the plan in aggregate is 123,751 shares of common stock for $1.0 million at average price of $8.05.

COVID-19: The Company has discussed COVID-19 throughout the 10-K, including but not limited, to forward-looking information, Item 1. Business, Item 1A. Risk Factors, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Notes to the Consolidated Financial Statements

16. Quarterly Results of Operations (Unaudited)

First Quarter Second Quarter Third Quarter Fourth Quarter

Earnings per share:

First Quarter Second Quarter Third Quarter Fourth Quarter

Earnings (loss) per share:

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure information required to be disclosed in its reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or internal controls will prevent all possible error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of March 31, 2020. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2020. Notwithstanding the material weaknesses described in Management’s Report on Internal Control over Financial Reporting below, the Company’s management, including its Chief Executive Officer and Chief Financial Officer, has concluded that the consolidated financial statements included in this Annual Report present fairly, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with accounting principles generally accepted in the United States.

Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements in accordance with generally accepted accounting principles. The Company’s management, including its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2020, the end of the fiscal year covered by this Report, based on the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that the Company’s internal control over financial reporting was not effective as of March 31, 2020 as a result of material weaknesses. A material weakness is a deficiency or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis.

The Company has considered the material weaknesses from the prior year, which has been incorporated into the current year material weaknesses. Management turnover was one of many contributing factors to the lack of Comprehensive SOX Compliance Program. Similarly, the lack of segregation of duties was one of several design gaps and design control deficiencies across multiple business processes. The Company is reporting two material weaknesses for the year ended, March 31, 2020, which are further discussed on the next page.

The Company completed a review of all activities performed or scheduled under the SOX Compliance program. Management started reperformance of key activities, including testing of design effectiveness of identified key controls. As result of these actions, the Company has noted two material weaknesses for:

1) Lack of Comprehensive SOX Compliance Program

Deficiencies were identified in key activities which prevented the Company from achieving full compliance with Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

2) Test of Design Effectiveness

Starting in the fourth quarter of Fiscal 2020, the Company identified several design gaps and design control deficiencies across multiple business processes and information technology general controls, which impacted the testing of operating effectiveness.

Notwithstanding the material weaknesses, the Company’s management, including its Chief Executive Officer and Chief Financial Officer, has concluded that the consolidated financial statements included in this Annual Report present fairly, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with accounting principles generally accepted in the United States.

Remedial Actions

The Company plans to take the remedial actions to address the current material weaknesses:

Management believes the foregoing efforts will effectively remediate the material weaknesses. As management continues to evaluate and work to improve internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify or supplement the remediation plan described above. Management cannot assure you, however, when the Company will remediate such weaknesses, nor can management be certain of whether additional actions will be required or the costs of any such actions.

Attestation report of the registered public accounting firm

This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission.

Changes in Internal Control Over Financial Reporting

No change in the Company’s internal control over financial reporting occurred during the Company’s fiscal quarter ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting, except as identified in Management’s Report on Internal Control over Financial Reporting above.

Item 9B. Other Information

None

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The relevant information to be set forth in the definitive Proxy Statement and Information Circular for the 2020 Annual General Meeting of Shareholders of the Company (the “Proxy Statement”), is incorporated herein by reference.

The Company has adopted a written code of ethics applicable to its chief executive officer, chief financial officer, principal accounting officer and persons performing similar functions. A copy of the code of ethics is posted on the Company’s web site at www.nicholasfinancial.com. The Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers from, the code of ethics by posting such information on the Company’s web site at www.nicholasfinancial.com. The Company is not including the information contained on or available through its web site as a part of, or incorporating such information by reference into, this Report.

Item 11. Executive Compensation, Compensation Interlocks and Insider Participation

The relevant information to be set forth in the Proxy Statement is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth certain information, as of March 31, 2020, with respect to compensation plans under which equity securities of the Company were authorized for issuance:

EQUITY COMPENSATION PLAN INFORMATION

(In thousands, except exercise price)

(a) (b) (c)

Equity Compensation Plans Approved by Security Holders 62 $ 10.71 662

The relevant information to be set forth in the Proxy Statement is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, Director Independence and Board of Directors

The relevant information to be set forth in the Proxy Statement is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

The relevant information to be set forth in the Proxy Statement is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) The following documents are filed as part of this Report:

(1)Financial Statements

See Part II, Item 8, of this Report.

(2)Financial Statement Schedules

All financial schedules are omitted as the required information is not applicable or the information is presented in the consolidated financial statements or related notes.

(3)Exhibits

Exhibit No. Description

3.1Articles of Nicholas Financial, Inc. (1)

3.2Notice of Articles of Nicholas Financial, Inc. (2)

4.1Form of Common Stock Certificate (3)

4.2Description of the Registrant’s Securities

10.1Second Amended and Restated Loan and Security Agreement, dated as of January 12, 2010, by and

among Nicholas Financial Inc., a Florida corporation, Bank of America, N.A., as agent, and each of the Lenders parties thereto (4)

10.2Amendment No. 1, dated as of September 1, 2011, to Second Amended and Restated Loan and Security

Agreement, dated as of January 12, 2010, by and among Nicholas Financial Inc., a Florida corporation, Bank of America, N.A., as agent, and each of the Lenders parties thereto (5)

10.3Amendment No. 2, dated as of December 21, 2012, to Second Amended and Restated Loan and Security

Agreement, dated as of January 12, 2010, by and among Nicholas Financial Inc., a Florida corporation, Bank of America, N.A., as agent, and each of the Lenders parties thereto (6)

10.4Amendment No. 3, dated as of November 14, 2014, to Second Amended and Restated Loan and

Security Agreement, dated as of January 12, 2010, by and among Nicholas Financial, Inc., a Florida corporation, Bank of America, N.A., as agent, and each of the Lenders parties thereto (7)

10.5Amendment No. 4, dated as of January 30, 2015, to Second Amended and Restated Loan and Security

Agreement, dated as of January 12, 2010, by and among Nicholas Financial, Inc., a Florida corporation, Bank of America, N.A., as agent, and each of the Lenders parties thereto (8)

10.6Amendment No. 5, dated as of December 30, 2016, to Second Amended and Restated Loan and Security

Agreement, dated as of January 12, 2010, by and among Nicholas Financial, Inc., a Florida corporation, Bank of America, N.A., as agent, and each of the Lenders parties thereto (9)

10.7Amendment No. 6 to Second Amended and Restated Loan and Security Agreement, dated June 30,

2017, among Nicholas Financial, Inc., Bank of America, N.A., and each of the Lenders party thereto (10)

10.8Waiver and Amendment No. 7 to Second Amended and Restated Loan and Security Agreement, dated

November 8, 2017, among Nicholas Financial, Inc., Bank of America, N.A., and the Lenders party thereto (11)

10.9Waiver and Amendment No. 8 to Second Amended and Restated Loan and Security Agreement, dated

March 30, 2018, among Nicholas Financial Inc., Bank of America, N.A., and the Lenders thereto (12)

10.10Waiver and Amendment No. 9 to Second Amended and Restated Loan and Security Agreement, dated

November 2, 2018, among Nicholas Financial, Inc., Bank of America, N.A., and the Lenders party thereto (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on November 6, 2018 (13)

10.21Note dated May 27, 2020 by the Company in favor of Fifth Third Bank (24)

10.23Nicholas Financial, Inc. 2015 Omnibus Incentive Plan (25) *

10.24Form of Nicholas Financial, Inc. 2015 Omnibus Incentive Plan Stock Option Award (26)*

10.25Form of Nicholas Financial, Inc. 2015 Omnibus Incentive Plan Restricted Stock Award (27)*

10.26Form of Nicholas Financial, Inc. 2015 Omnibus Incentive Plan Performance Share Award (28)*

10.29Form of Dealer Agreement and Schedule thereto listing dealers that are parties to such agreements (31)

21Subsidiaries of Nicholas Financial, Inc. (32)

23.1Consent of RSM, LLP

24Powers of Attorney (included on signature page hereto)

31.1Certification of President and Chief Executive Officer

31.2Certification of Chief Financial Officer

32.1Certification of the Chief Executive Officer Pursuant to 18 U.S.C. § 1350

32.2Certification of the Chief Financial Officer Pursuant to 18 U.S.C. § 1350

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema Document

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

101.LAB XBRL Taxonomy Extension Labels Linkbase Document

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

OLD MARKET CAPITAL Corp OMCC US Equity

OMCC · 10-K · period ended 2020-03-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation, Compensation Interlocks and Insider Participation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, Director Independence and Board of Directors

Item 14. Principal Accountant Fees and Services

Item 15. Exhibits and Financial Statement Schedules

OLD MARKET CAPITAL Corp OMCC US Equity☆

OMCC · 10-K · period ended 2020-03-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation, Compensation Interlocks and Insider Participation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, Director Independence and Board of Directors

Item 14. Principal Accountant Fees and Services

Item 15. Exhibits and Financial Statement Schedules

OLD MARKET CAPITAL Corp OMCC US Equity